Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2
of the Exchange Act. (Check one):

Large accelerated filer [X]

Accelerated filer [ ]

Non-accelerated filer [ ]

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest practicable
date.

NATIONAL INSTRUMENTS
CORPORATION

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

The accompanying unaudited
consolidated financial statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 2006 included in
our annual report on Form 10-K filed with the Securities and Exchange Commission. In our
opinion, the accompanying consolidated financial statements reflect all adjustments
(consisting only of normal recurring items) considered necessary to present fairly our
financial position at June 30, 2007 and December 31, 2006, and the results of our
operations for the three-month and six-month periods ended June 30, 2007 and 2006, and the
cash flows for the six-month periods ended June 30, 2007 and 2006. Operating results for
the three-month and six-month periods ended June 30, 2007 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2007.

Basic earnings per share
(EPS) is computed by dividing net income by the weighted average number of
common shares outstanding during each period. Diluted EPS is computed by dividing net
income by the weighted average number of common shares and common share equivalents
outstanding (if dilutive) during each period. The number of common share equivalents,
which include stock options and restricted stock units, is computed using the treasury
stock method.

The reconciliation of the
denominators used to calculate basic EPS and diluted EPS for the three-month and six-month
periods ended June 30, 2007 and 2006, respectively, are as follows (in thousands):

Three Months Ended
June 30,

Six Months Ended
June 30,

(unaudited)

(unaudited)

2007

2006

2007

2006

Weighted average shares outstanding-basic

79,363

79,611

79,601

79,334

Plus: Common share equivalents

Stock options, restricted stock units

1,425

2,042

1,408

2,257

Weighted average shares outstanding-diluted

80,788

81,653

81,009

81,591

Stock options to acquire 2,543,000
and 3,410,000 shares for the quarters ended June 30, 2007 and 2006, respectively, and
2,624,000 and 2,911,000 shares for the six months ended June 30, 2007 and 2006,
respectively, were excluded in the computations of diluted EPS because the effect of
including the stock options would have been anti-dilutive.

Software development costs
capitalized for the three months ended June 30, 2007 and 2006 were $3.6 million and $2.8
million, respectively, and related amortization was $2.1 million and $2.5 million,
respectively. Software development costs capitalized for the six months ended June 30,
2007 and 2006 were $6.0 million and $4.0 million, respectively, and related amortization
was $4.3 million and $5.0 million, respectively. Amortization of capitalized software
development costs is computed on an individual product basis for those products available
for market and is recognized based on the products estimated economic life, generally
three years. Patents are amortized using the straight-line method over their estimated
period of benefit, generally ten to seventeen years. Total intangible assets amortization
expenses were $3.5 million and $3.7 million for the three months ended June 30, 2007 and
2006, respectively, and were $6.9 million and $7.5 million for the six months ended June
30, 2007 and 2006, respectively.

Acquired core technology and
intangible assets are amortized over their useful lives, which range from three to eight
years. Amortization expense for intangible assets acquired was approximately $800,000 and
$800,000 for the three months ended June 30, 2007 and 2006, respectively, of which
approximately $680,000 and $677,000 was recorded in cost of sales for the three months
ended June 30, 2007 and 2006, respectively, and approximately $120,000 and $123,000 was
recorded in operating expenses for the three months ended June 30, 2007 and 2006,
respectively. The estimated amortization expense of intangible assets acquired for the
current fiscal year and in future years will be recorded in the consolidated statements of
income as follows (in thousands):

The excess purchase price over the fair value of assets acquired is recorded as goodwill. In accordance with SFAS 142, Goodwill and
Other Intangible Assets, goodwill is tested for impairment on an annual basis, and between annual tests if indicators of potential
impairment exist, using a fair-value-based approach. Our annual impairment test was performed on April 6, 2007. No impairment of
goodwill was identified. Goodwill is deductible for tax purposes.

In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation ("FIN") 48, Accounting for Uncertainty in
Income Taxes - an interpretation of Statement of Financial Accounting Standards ("SFAS") 109. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an entity's financial statements and prescribes a recognition threshold and measurement
attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. We adopted FIN 48 on
January 1, 2007, as required. The cumulative effect of adopting FIN 48 was $96,000, which was recorded as a reduction in beginning
retained earnings upon adoption, as required. We recognized no material adjustment to the liability for unrecognized income tax
benefits. We had $4.6 million of unrecognized tax benefits at January 1, 2007 and $6.0 million at June 30, 2007, all of which would
affect our effective income tax rate if recognized. None of our unrecognized income tax benefits are expected to significantly
decrease or increase within the next twelve months. Our continuing policy is to recognize interest and penalties related to income
tax matters in income tax expense. As of June 30, 2007, we have approximately $278,000 accrued for interest related to uncertain tax
positions. The tax years 2000 through 2006 remain open to examination by the major taxing jurisdictions to which we are subject.

Our comprehensive income is comprised of net income, foreign currency translation gains and losses and unrealized gains and losses on
forward contracts and securities available for sale. Comprehensive income for the three-month and six-month periods ended June 30,
2007 and 2006 were as follows (in thousands):

Our stockholders approved the 1994
Incentive Stock Option Plan (the 1994 Plan) on May 9, 1994. At the time of
approval, 9,112,500 shares of our common stock were reserved for issuance under this plan.
In 1997, an additional 7,087,500 shares of our common stock were reserved for issuance
under this plan, and an additional 750,000 shares were reserved for issuance under this
plan in 2004. The 1994 Plan terminated in May 2005, except with respect to outstanding
awards previously granted thereunder. Awards under the plan were either incentive stock
options within the meaning of Section 422 of the Internal Revenue Code or nonqualified
options. The right to purchase shares vests over a five to ten-year period, beginning on
the date of grant. Vesting of ten year awards may accelerate based on the Companys
previous years earnings and growth but shares cannot accelerate to vest over a
period of less than five years. Stock options must be exercised within ten years from date
of grant. Stock options were issued at the market price at the grant date. As part of the
requirements of SFAS 123R, the Company is required to estimate potential forfeitures of
stock grants and adjust compensation cost recorded accordingly. The estimate of
forfeitures will be adjusted over the requisite service period to the extent that actual
forfeitures differ, or are expected to differ, from such estimates. Changes in estimated
forfeitures will be recognized through a cumulative catch-up adjustment in the period of
change and will also impact the amount of stock compensation expense to be recognized in
future periods.

Transactions under all stock option
plans are summarized as follows:

Number of shares
under option

Weighted average
Exercise price

Outstanding at December 31, 2006

6,914,673

$

22.49

Exercised

(996,500

)

$

28.35

Canceled

(79,142

)

$

27.19

Granted

0

0

Outstanding at June 30, 2007

5,839,031

$

23.97

The aggregate intrinsic value of
stock options at exercise, represented in the table above, was $14.9 million for the six
months ended June 30, 2007. Total unrecognized stock-based compensation expense related to
non-vested stock options was approximately $14.8 million as June 30, 2007, related to
approximately 1,166,000 shares with a per share weighted average fair value of $16.10. We
anticipate this expense to be recognized over a weighted average period of approximately
3.6 years.

Outstanding and Exercisable by Price RangeAs of June 30, 2007

Options Outstanding

Options Exercisable

Range of Exercise prices

Number outstanding as of 06/30/2007

Weighted average remaining contractual life

Weighted average exercise price

Number exercisableas of 06/30/2007

Weighted average exercise price

$ 11.3333  $ 15.3055

1,207,230

1.38

$

13.9645

1,193,873

$

13.9598

$ 15.5555  $ 21.0417

1,620,784

4.72

$

20.6501

1,234,172

$

20.6462

$ 21.2533  $ 29.5400

762,024

6.27

$

25.5534

536,587

$

25.5900

$ 29.8500  $ 31.2917

1,003,888

5.75

$

30.0173

576,876

$

30.1188

$ 32.0833  $ 34.3750

1,245,105

3.94

$

32.1465

1,131,760

$

32.1454

$ 11.3333  $ 34.3750

5,839,031

3.84

$

23.9697

4,673,268

$

23.4598

The weighted average remaining contractual life of options exercisable as of June 30, 2007 was 3.41 years. The aggregate intrinsic
value of options outstanding as of June 30, 2007 was $50.2 million. The aggregate intrinsic value of options currently exercisable as
of June 30, 2007 was $42.6 million. No options were granted in the six months ended June 30, 2007 as our incentive option plan
terminated in May 2005.

Our stockholders approved the 2005 Incentive Plan ("2005 Plan") on May 10, 2005. At the time of approval, 2,700,000 shares of our
common stock were reserved for issuance under this plan, as well as the number of shares which had been reserved, but not issued
under the 1994 Plan (our stock option plan which terminated in May 2005), and any shares that returned to the 1994 Plan as a result
of termination of options or repurchase of shares issued under such plan. The 2005 Plan, administered by the Compensation Committee
of the Board of Directors, provides for granting of incentive awards in the form of restricted stock units to directors, executive
officers and employees of the Company and its subsidiaries. Awards vest over a three, five or ten-year period, beginning on the date
of grant. Vesting of ten year awards may accelerate based on the Company's previous year's earnings and growth but ten year awards
cannot accelerate to vest over a period of less than five years. Shares available for grant at June 30, 2007 were 3,112,204. As part
of the requirements of SFAS 123R, we are required to estimate potential forfeitures of restricted stock units and adjust compensation
cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual
forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a
cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized
in future periods.

Transactions under the restricted stock plan are summarized as follows:

RSUs

Number of RSUs

Weighted Average
Grant Price

Balance at December 31, 2006

1,324,933

$

26.77

Granted

726,030

27.28

Earned

(209,303

)

27.85

Canceled

(34,128

)

27.50

Balance at June 30, 2007

1,807,532

$

26.44

Total unrecognized stock-based
compensation expense related to non-vested restricted stock units was approximately $48.3
million as of June 30, 2007, related to 1,807,532 shares with a per share weighted average
fair value of $32.57. We anticipate this expense to be recognized over a weighted average
period of approximately 7.0 years.

Our employee stock purchase plan
permits substantially all domestic employees and employees of designated subsidiaries to
acquire our common stock at a purchase price of 85% of the lower of the market price at
the beginning or the end of the participation period. On December 21, 2005, our
Compensation Committee amended the purchase periods to be quarterly beginning on November
1, February 1, May 1 and August 1 of each year. The initial period commenced on April 1,
2006 and ended on July 31, 2006. Employees may designate up to 15% of their compensation
for the purchase of common stock. The aggregate number of shares of common stock reserved
for future employee purchases was 3,546,627 shares at June 30, 2007. In May 2007, our
shareholders approved an additional 3,000,000 shares to be reserved under this plan. The
number of shares issued under this plan for the six month period ended June 30, 2007 was
276,682. The weighted average fair value of the employees purchase rights was 24.08
and was estimated using the Black-Scholes model with the following assumptions:

We have 5,000,000 authorized shares
of preferred stock. On January 21, 2004, our Board of Directors designated 750,000 of
these shares as Series A Participating Preferred Stock in conjunction with its adoption of
a Preferred Stock Rights Agreement (the Rights Agreement) and declaration of a
dividend of one preferred share purchase right (a Right) for each share of
common stock outstanding held as of May 10, 2004 or issued thereafter. Each Right will
entitle its holder to purchase one one-thousandth of a share of National Instruments
Series A Participating Preferred Stock at an exercise price of $200, subject to
adjustment, under certain circumstances. The Rights Agreement was not adopted in response
to any effort to acquire control of National Instruments.

The Rights only become exercisable in
certain limited circumstances following the tenth day after a person or group announces
acquisitions of or tender offers for 20% or more of our common stock. In addition, if an
acquirer (subject to certain exclusions for certain current stockholders of National
Instruments, an Acquiring Person) obtains 20% or more of our common stock,
then each Right (other than the Rights owned by an Acquiring Person or its affiliates)
will entitle the holder to purchase, for the exercise price, shares of our common stock
having a value equal to two times the exercise price. Under certain circumstances, our
Board of Directors may redeem the Rights, in whole, but not in part, at a purchase price
of $0.01 per Right. The Rights have no voting privileges and are attached to and
automatically traded with our common stock until the occurrence of specified trigger
events. The Rights will expire on the earlier of May 10, 2014 or the exchange or the
redemption of the Rights.

We offer a one-year limited warranty
on most hardware products, with a two or three-year warranty on a subset of our hardware
products, which is included in the sales price of many of our products. Provision is made
for estimated future warranty costs at the time of sale pursuant to SFAS 5, Accounting
for Contingencies, for the estimated costs that may be incurred under the basic
limited warranty. Our estimate is based on historical experience and product sales during
this period.

The warranty reserve for the
six-month periods ended June 30, 2007 and 2006, respectively, was as follows (in
thousands):

Six Months Ended
June 30,

(unaudited)

2007

2006

Balance at the beginning of the period

$

867

$

915

Accruals for warranties issued during the period

784

825

Settlements made (in cash or in kind) during the period

(901

)

(825

)

Balance at the end of the period

$

750

$

915

As of June 30, 2007, we have
outstanding guarantees for payment of foreign operating leases, customs and foreign grants
totaling approximately $4.5 million.

As of June 30, 2007, we have
non-cancelable purchase commitments with various suppliers of customized inventory and
inventory components totaling approximately $7.0 million over the next twelve months.

NOTE 10  Segment
Information

While we sell our products to many
different markets, management has chosen to organize the Company by geographic areas, and
as a result has determined that we have one operating segment. Substantially all of the
depreciation and amortization is recorded in the Americas. Net sales, operating income,
identifiable assets, and interest income, classified by the major geographic areas in
which we operate, are as follows (in thousands):

Three Months Ended
June 30,

Six Months Ended
June 30,

(unaudited)

(unaudited)

2007

2006

2007

2006

Net sales:

Americas:

Unaffiliated customer sales

$

83,895

$

78,312

$

161,856

$

153,204

Geographic transfers

30,303

37,851

60,033

61,809

114,198

116,163

221,889

215,013

Europe:

Unaffiliated customer sales

56,117

47,090

108,028

92,475

Geographic transfers

47,761

38,413

76,597

76,632

103,878

85,503

184,625

169,107

Asia Pacific:

Unaffiliated customer sales

39,485

34,721

81,255

69,196

Eliminations

(78,064

)

(76,264

)

(136,630

)

(138,441

)

$

179,497

$

160,123

$

351,139

$

314,875

Operating income:

Americas

$

20,229

$

15,945

$

36,910

$

26,451

Europe

22,249

19,548

41,276

40,625

Asia Pacific

12,246

12,815

27,876

25,040

Unallocated:

Research and development expenses

(30,525

)

(27,397

)

(59,761

)

(55,379

)

$

24,199

$

20,911

$

46,301

$

36,737

Six Months Ended
June 30,

(unaudited)

2007

2006

Interest income:

Americas

$

2,647

$

2,859

Europe

1,723

63

Asia Pacific

72

12

$

4,442

$

2,934

June 30,
2007

December 31,
2006

(unaudited)

Identifiable assets:

Americas

$

386,987

$

476,027

Europe

267,943

188,388

Asia Pacific

68,966

56,805

$

723,896

$

721,220

Total sales outside the United States
for the quarter and six months ended June 30, 2007 were $103.7 million and $210.4 million,
respectively, and for the quarter and six months ended June 30, 2006 were $89.6 million
and $177.3 million, respectively.

In July 2006, the Financial
Accounting Standards Board (FASB) issued FASB Interpretation (FIN)
48, Accounting for Uncertainty in Income Taxes  an interpretation of Statement of
Financial Accounting Standards (SFAS) 109. This interpretation clarifies
the accounting for uncertainty in income taxes recognized in an entitys financial
statements in accordance with SFAS 109, Accounting for Income Taxes. It prescribes
a recognition threshold and measurement attribute for financial statement disclosure of
tax positions taken or expected to be taken on a tax return. This interpretation is
effective for fiscal years beginning after December 15, 2006. We adopted FIN 48 on January
1, 2007, as required. The adoption of FIN 48 did not have a significant impact on our
financial position or results of operations. (See Note 6 of Notes to Consolidated
Financial Statements.)

In September 2006, the FASB issued
SFAS 157, Fair Value Measurements. This standard defines fair value, establishes a
framework for measuring fair value in accounting principles generally accepted in the
United States of America, and expands disclosure about fair value measurements. This
pronouncement applies under other accounting standards that require or permit fair value
measurements. Accordingly, this statement does not require any new fair value measurement.
This statement is effective for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. We will be required to adopt SFAS 157 in the
first quarter of fiscal year 2008. We are currently evaluating the requirements of SFAS
157 and have not yet determined the impact on our consolidated financial statements.

In March 2006, the Emerging Issues
Task Force (EITF) reached a consensus on EITF Issue 06-3, How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (that is, Gross versus Net Presentation). Taxes within the scope
of EITF Issue 06-3 include any taxes assessed by a governmental authority that are
directly imposed on a revenue-producing transaction between a seller and a customer and
may include, but are not limited to, sales taxes, use taxes, value-added taxes, and some
excise taxes. The EITF concluded that the presentation of these taxes on either a gross
(included in revenues and costs) or a net (excluded from revenue) basis is an accounting
policy decision that should be disclosed. For any such taxes that are reported on a gross
basis, a company should disclose the amounts of those taxes in interim and annual
financial statements. Our policy is to exclude all such taxes from revenue. The provisions
of EITF 06-3 are effective for interim and annual reporting periods beginning after
December 15, 2006. The adoption of EITF 06-3 did not have any effect on our consolidated
financial statements.

In February 2007, the FASB issued
SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities
 including an amendment of FASB Statement 115. This standard permits an
entity to measure many financial instruments and certain other assets and liabilities at
fair value on an instrument-by-instrument basis. We will be required to adopt SFAS 159 in
the first quarter of fiscal year 2008. We are currently evaluating the requirements of
SFAS 159 and have not yet determined the impact on our consolidated financial statements.

We filed a patent infringement action
on January 25, 2001 in the U.S. District Court, Eastern District of Texas (Marshall
Division) claiming that The MathWorks, Inc. (MathWorks) infringed certain of
our U.S. patents. On January 30, 2003, a jury found infringement by MathWorks of three of
the patents involved and awarded us specified damages. On June 23, 2003, the District
Court entered final judgment in favor of us and entered an injunction against
MathWorks sale of its Simulink and related products and stayed the injunction
pending appeal. Upon appeal, the judgment and the injunction were affirmed by the U.S.
Court of Appeals for the Federal Circuit (September 3, 2004). Subsequently the stay of
injunction was lifted by the District Court. In November 2004, the final judgment amount
of $7.4 million which had been held in escrow pending appeal was released to us.

An action was filed by MathWorks
against us on September 22, 2004, in the U.S. District Court, Eastern District of Texas
(Marshall Division), claiming that on that day MathWorks had released modified versions of
its Simulink and related products, and seeking a declaratory judgment that the modified
products do not infringe the three patents adjudged infringed in the District Courts
decision of June 23, 2003, (and affirmed by the Court of Appeals on September 3, 2004). On
November 2, 2004, MathWorks served the complaint on us. We filed an answer to
MathWorks declaratory judgment complaint, denying MathWorks claims of
non-infringement and alleging our own affirmative defenses. On January 5, 2005, the Court
denied a contempt motion by us to enjoin the modified Simulink products under the
injunction in effect from the first case. On January 7, 2005, we amended our answer to
include counterclaims that MathWorks modified products are infringing three of our
patents, and requested unspecified damages and an injunction. MathWorks filed its reply to
our counterclaims on February 7, 2005, denying the counterclaims and alleging affirmative
defenses. On March 2, 2005, we filed a notice of appeal regarding the Courts denial
of the contempt motion. On March 15, 2005, the Court stayed MathWorks declaratory
judgment action, pending a decision on the appeal by the Court of Appeals for the Federal
Circuit. On February 9, 2006, the Court of Appeals for the Federal Circuit affirmed the
District Courts January 2005 order. On November 22, 2006, the District Court lifted
the stay. The case schedule has yet to be set in this action. During the fourth quarter of
2004, we accrued $4 million related to our probable loss from this contingency, which
consists entirely of anticipated patent defense costs that are probable of being incurred.
In the fourth quarter of 2006, we accrued an additional $600,000 related to this
contingency. We charged approximately $9,000 against this accrual during the second
quarter of 2007. We have charged a total of $611,000 against this accrual through June 30,
2007.

On July 26, 2007, the Companys
Board of Directors declared a quarterly cash dividend of $0.10 per common share, payable
on September 4, 2007 to shareholders of record on August 13, 2007.

On July 26, 2007, our Board of
Directors granted authorization for the repurchase of an additional 2,360,730 shares of
our common stock under our share repurchase plan.

Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations

This
Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Any statements contained herein regarding our future financial performance or
operations (including, without limitation, statements to the effect that we
believe, expect, plan, may,
will, project, continue, or estimate or
other variations thereof or comparable terminology or the negative thereof) should be
considered forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of a number of important factors
including those set forth under the heading Risk Factors beginning on page
23, and the discussion below. Readers are also encouraged to refer to the
documents regularly filed by us with the Securities and Exchange Commission, including our
Annual Report on Form 10-K for further discussion of our business and the risks attendant
thereto.

National
Instruments designs, develops, manufactures and markets instrumentation and automation
software and hardware for general commercial, industrial and scientific applications. We
offer hundreds of products used to create virtual instrumentation systems for measurement
and automation. We have identified a large and diverse market for design, control and test
applications. Our products are used in a variety of applications from research and
development to production testing, monitoring and industrial control. We sell to a large
number of customers in a wide variety of industries. No single customer accounted for more
than 3% of our sales in the quarter or six months ended June 30, 2007 or in the years
2006, 2005 or 2004.

The key strategies that management
focuses on in running our business are the following:

We
strive to increase our already broad customer base by serving a large market on many
computer platforms, through a global marketing and distribution network. We also seek to
acquire new technologies and expertise from time to time in order to open up new
opportunities for our existing product portfolio. While we continue our efforts to expand
our customer base, we are also benefitting from our efforts to increase order size from
both new and existing customers.

To
maintain a high level of customer satisfaction we strive to offer innovative, modular and
integrated products through a global sales and support network. We strive to maintain a
high degree of backwards compatibility across different platforms in order to preserve the
customers investment in our products. In this time of intense global competition, it
is critical that we continue to offer products with quality and reliability, and that
these products provide cost-effective solutions for our customers.

Our
product strategy is to provide superior products by leveraging generally available
technology, supporting open architectures on multiple platforms and by leveraging our own
core technologies such as custom ASICs (application-specific integrated circuits) across
multiple products.

We
sell into the test and measurement (T&M) and the industrial automation
(IA) industries and as such are subject to the economic and industry forces
which drive those markets. It has been our experience that the performance of these
industries and our performance is impacted by general trends in industrial production for
the global economy and by the specific performance of certain vertical markets that are
intensive consumers of measurement technologies. Examples of these markets are
semiconductor capital equipment, telecom, defense, aerospace, automotive and others. In
assessing our business, our management considers the trends in Global Purchasing Managers
Index (published by JP Morgan), global industrial production as well as industry reports
on the specific vertical industries mentioned earlier.

We
distribute our software and hardware products primarily through a direct sales
organization. We also use independent distributors, OEMs, VARs, system integrators and
consultants to market and sell our products. We have sales offices in the United States
and sales offices and distributors in key international markets. Sales outside of the
Americas accounted for approximately 53% and 51% of our revenues in the three month
periods ended June 30, 2007 and 2006, respectively. The vast majority of our foreign sales
are denominated in the customers local currency, which exposes us to the effects of
changes in foreign-currency exchange rates. We expect that a significant portion of our
total revenues will continue to be derived from international sales. See Note 10 of Notes
to Consolidated Financial Statements for details concerning the geographic breakdown of
our net sales, operating income, interest income and identifiable assets.

We
manufacture a substantial majority of our products at our facilities in Debrecen, Hungary.
Additional production primarily of low volume or newly introduced products is done in
Austin, Texas. Our product manufacturing operations can be divided into four areas:
electronic circuit card and module assembly; chassis and cable assembly; technical manuals
and product support documentation; and software duplication. We manufacture most of the
electronic circuit card assemblies, modules and chassis in-house, although subcontractors
are used from time to time. Some chassis are produced by subcontractors in Asia. We
manufacture some of our electronic cable assemblies in-house, but many assemblies are
produced by subcontractors. We primarily subcontract our software duplication, our
technical manuals, and product support documentation.

We
believe that our long-term growth and success depends on delivering high quality software
and hardware products on a timely basis. Accordingly, we focus significant efforts on
research and development. We focus our research and development efforts on enhancing our
existing products and developing new products that incorporate appropriate features and
functionality to be competitive with respect to technology and price/performance. Our
success also is dependant on our ability to obtain and maintain patents and other
proprietary rights related to technologies used in our products. We have engaged in
litigation to protect our intellectual property rights. In monitoring and policing our
intellectual property rights, we have been and may be required to spend significant
resources.

We
have been profitable in every year since 1990. However, there can be no assurance that our
net sales will grow or that we will remain profitable in future periods. As a result, we
believe historical results of operations should not be relied upon as indications of
future performance.

Results of Operations

The
following table sets forth, for the periods indicated, the percentage of net sales
represented by certain items reflected in our consolidated statements of income:

Three Months Ended
June 30,

Six Months Ended
June 30,

2007

2006

2007

2006

Net sales:

Americas

46.7

%

48.9

%

46.1

%

48.6

%

Europe

31.3

29.4

30.8

29.4

Asia Pacific

22.0

21.7

23.1

22.0

Consolidated net sales

100.0

100.0

100.0

100.0

Cost of sales

24.6

25.5

24.6

26.2

Gross profit

75.4

74.5

75.4

73.8

Operating expenses:

Sales and marketing

36.3

36.0

36.7

36.2

Research and development

17.0

17.0

17.0

17.5

General and administrative

8.6

8.4

8.5

8.4

Total operating expenses

61.9

61.4

62.2

62.1

Operating income

13.5

13.1

13.2

11.7

Other income (expense):

Interest income

1.2

1.0

1.2

0.9

Net foreign exchange gain (loss)

0.2

0.1

0.1

(0.1

)

Other income (expense), net



(0.1

)





Income before income taxes

14.9

14.1

14.5

12.5

Provision for income taxes

3.3

3.5

3.2

3.1

Net income

11.6

%

10.6

%

11.3

%

9.4

%

Net
Sales. Consolidated net sales increased by $19.4 million or 12% for the
three months ended June 30, 2007 to $179.5 million from $160.1 million for the three
months ended June 30, 2006, and increased $36.3 million or 12% to $351.1 million for the
six months ended June 30, 2007 from $314.9 million for the comparable period in the prior
year. The increases in sales for the three and six months ended June 30, 2007 were
primarily attributable to the introduction of new and upgraded products, an increased
market acceptance of our virtual instrumentation and graphical system design products,
which constitute the vast majority of our product portfolio, in all regions and the
strengthening of the euro. This increase in sales was offset slightly by the decrease in
sales of our instrument control products. Sales in the Americas in the second quarter of
2007 increased 7% from the second quarter of 2006 and sales in the Americas for the six
months ended June 30, 2007 increased 6% from the six months ended June 30, 2006.

Sales
outside of the Americas, as a percentage of consolidated sales for the quarter ended June
30, 2007, increased to 53.3% from 51.1% over the comparable 2006 period as a result of a
stronger euro and faster sales growth outside of the Americas. Sales outside of the Americas, as a percentage of consolidated sales for
the six months ended June 30, 2007, increased to 53.9% from 51.4% over the comparable 2006
period due to a stronger euro and faster sales growth outside of the Americas. Compared to the corresponding periods in 2006, the
Companys European sales increased by 19% to $56.1 million for the quarter ended June
30, 2007 and increased 17% to $108.0 million for the six months ended June 30, 2007. Sales
in Asia Pacific increased by 14% to $39.5 million in the quarter ended June 30, 2007
compared to the same period in 2006 and increased 17% to $81.3 million for the six months
ended June 30, 2007 compared to the same period in 2006. We expect sales outside of the
Americas to continue to represent a significant portion of our revenue. We intend to
continue to expand our international operations by increasing our presence in existing
markets, adding a presence in some new geographical markets and continuing the use of
distributors to sell our products in some countries.

Almost
all sales made by our direct sales offices in Europe and Asia Pacific are denominated in
local currencies, and accordingly, the U.S. dollar equivalent of these sales is affected
by changes in foreign currency exchange rates. Between the second quarter of 2006 and the
second quarter of 2007, net of hedging results, the change in exchange rates had the
effect of increasing our consolidated sales by 3%, increasing European sales by 10% and
increasing sales in Asia Pacific by 1%. For 2007 year-to-date sales, net of hedging
results, the change in exchange rates had the effect of increasing our consolidated sales
by 3%. Since most of our international operating expenses are also incurred in local
currencies, the change in exchange rates had the effect of increasing operating expenses
by $1.6 million, or 1.5%, for the quarter ended June 30, 2007 and by $3.5 million, or
1.6%, for the six months ended June 30, 2007 compared to the comparable prior year
periods.

Gross
Profit. As a percentage of sales, gross profit increased to 75.4% for the
second quarter of 2007 from 74.5% for the second quarter of 2006 and increased to 75.4%
for the first six months of 2007 from 73.8% for the comparable period a year ago. The
higher margin in the second quarter of 2007 compared to the 2006 period is attributable to
favorable foreign exchange rates and the favorable impact of higher sales volume. The
higher margin in the first six months of 2007 compared to the comparable prior year period
is attributable to favorable foreign currency exchange rates, the favorable impact of
higher sales volume and improved product margins resulting from both price increases and
cost reductions on certain products. There can be no assurance that we will maintain our
historical margins. We believe our current manufacturing capacity is adequate to meet
current needs.

Sales
and Marketing. Sales and marketing expenses for the second quarter of 2007
increased to $65.3 million, a 13% increase, compared to the second quarter of 2006 and
increased 13% to $128.9 million for the first six months of 2007 from the comparable 2006
period. The increases in sales and marketing expenses in the quarter and in the six months
ended June 30, 2007 from the comparable prior year periods were attributable to increases
in sales and marketing personnel costs due to the increase in sales and marketing
personnel and the increase in variable compensation from higher sales volume. As a
percentage of net sales, sales and marketing expenses were 36.3% and 36.0% for the three
months ended June 30, 2007 and 2006, respectively, and 36.7% and 36.2% for the six months
ended June 30, 2007 and 2006, respectively. We expect sales and marketing expenses in
future periods to increase in absolute dollars, and to fluctuate as a percentage of sales
based on recruiting, marketing and advertising campaign costs associated with major new
product releases and entry into new market areas, investment in web sales and marketing
efforts, increasing product demonstration costs and the timing of domestic and
international conferences and trade shows.

Research
and Development. Research and development expenses increased to $30.5
million for the quarter ended June 30, 2007, an 11% increase, compared to $27.4 million
for the three months ended June 30, 2006, and increased 8% to $59.8 million for the six
months ended June 30, 2007 from the comparable 2006 period. The increases in research and
development costs in the quarter and six-month periods ended June 30, 2007 versus the
comparable prior year periods were primarily due to increases in personnel costs from the
hiring of additional product development engineers. We plan to continue making a
significant investment in research and development in order to remain competitive and
support revenue growth.

We
capitalize software development costs in accordance with Statements of Financial
Accounting Standards (SFAS) 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed. We amortize such costs over
the related products estimated economic useful life, generally three years,
beginning when a product becomes available for general release. Software amortization
expense included in cost of goods sold totaled $2.1 million and $2.5 million for the
quarters ended June 30, 2007 and 2006, respectively, and $4.3 million and $5.0 million
during the six months ended June 30, 2007 and 2006, respectively. Internally developed
software costs capitalized were $3.6 million and $2.8 million for the quarters ended June
30, 2007 and 2006, respectively, and $6.0 million and $4.0 million for the first six
months of 2007 and 2006, respectively.

General
and Administrative. General and administrative expenses increased to $15.4
million for the quarter ended June 30, 2007, a 15% increase, compared to $13.4 million for
the three months ended June 30, 2006, and increased 14% to $30.0 million for the six
months ended June 30, 2007 from the comparable 2006 period. As a percentage of net sales,
general and administrative expenses increased to 8.6% for the quarter ended June 30, 2007
from 8.4% for the second quarter of 2006. During the first six months of 2007, general and
administrative expenses increased as a percentage of sales to 8.5% from 8.4% for the
comparable prior year period. The increases in general and administrative expenses for the
quarter and six months ended June 30, 2007 from comparable prior year periods were
primarily attributable to increases in personnel costs due to the increase in general and
administrative personnel. We expect that general and administrative expenses in future
periods will fluctuate in absolute amounts and as a percentage of revenue.

Interest
Income.Interest income in the second quarter of 2007 increased to $2.2
million from $1.7 million in the second quarter of 2006, and increased to $4.4 million for
the first six months of 2007 from $2.9 million for the comparable 2006 period. The
increases in interest income for the quarter and six months ended June 30, 2007 were due
to higher yields on increased invested funds. The primary source of interest income is
from the investment of our cash and short-term investments. Net cash provided by operating
activities totaled $70.2 million and $36.0 million in the six month periods ended June 30,
2007 and 2006, respectively.

Net
Foreign Exchange Gain (Loss).We experienced net foreign exchange gains of
$341,000 in the second quarter of 2007 compared to gains of $149,000 in the second quarter
of 2006. Net foreign exchange gains of $530,000 were recognized for the first six months
of 2007 compared to losses of $237,000 for the first six months of 2006. These results are
attributable to movements between the U.S. dollar and the local currencies in countries in
which our subsidiaries are located. We recognize the local currency as the functional
currency in virtually all of our international subsidiaries.

We
utilize foreign currency forward contracts to hedge a majority of our foreign
currency-denominated receivables in order to reduce our exposure to significant foreign
currency fluctuations. We typically limit the duration of our receivables
foreign currency forward contracts to approximately 90 days.

We
also utilize foreign currency forward contracts and foreign currency purchased option
contracts in order to reduce our exposure to fluctuations in future foreign currency cash
flows. We purchase these contracts for up to 100% of our forecasted cash flows in selected
currencies (primarily the euro, yen and pound sterling) and limit the duration of these
contracts to 40 months. Our foreign currency purchased option contracts are purchased
at-the-money or out-of-the-money. As a result, our hedging
activities only partially address our risks in foreign currency transactions, and there
can be no assurance that this strategy will be successful. We do not invest in contracts
for speculative purposes. Our hedging strategy reduced our foreign exchange gains by
$151,000 and $206,000 for the quarter and six months ended June 30, 2007, respectively,
and reduced our foreign exchange gains by $736,000 and $1.1 million for the quarter and
six months ended June 30, 2006, respectively.

Provision
for Income Taxes. Our provision for income taxes reflects an effective tax
rate of 22% for the three and six months ended June 30, 2007 and 25% for the three and six
months ended June 30, 2006. Our effective tax rate is lower than the U.S. federal
statutory rate of 35% primarily as a result of the extraterritorial income exclusion,
tax-exempt interest and reduced tax rates in certain foreign jurisdictions. The decreases
in our tax rate for the three months and six months ended June 30, 2007, from the
comparable prior year periods are due to increased profits in foreign jurisdictions with
reduced income tax rates.

We
currently finance our operations and capital expenditures through cash flow from
operations. At June 30, 2007, we had working capital of approximately $368.8 million
compared to $377.6 million at December 31, 2006. Net cash provided by operating activities
for the six month periods ended June 30, 2007 and 2006 totaled $70.2 million and $36.0
million, respectively.

Accounts
receivable decreased to $116.6 million at June 30, 2007 from $117.2 million at December
31, 2006. Days sales outstanding remained flat at 59 at June 30, 2007 compared to June 30,
2006. Consolidated inventory balances decreased to $75.5 million at June 30, 2007 from
$77.1 million at December 31, 2006. Inventory turns increased to 2.4 for the quarter ended
June 30, 2007 from turns of 2.0 for the quarter ended June 30, 2006. Cash used in the
first six months of 2007 for the purchase of property and equipment totaled $11.7 million,
for the capitalization of internally developed software costs totaled $6.0 million, and
for additions to other intangibles totaled $4.4 million. Cash used in the first six months
of 2006 for the purchase of property and equipment totaled $6.5 million, for the
capitalization of internally developed software costs totaled $4.0 million, and for
additions to other intangibles totaled $949,000.

Cash
provided by the issuance of common stock totaled $19.6 million and $16.6 million for the
first six months of 2007 and 2006, respectively. The issuance of common stock was to
employees under our Employee Stock Purchase Plan, our 1994 Incentive Plan and our 2005
Incentive Plan. Cash used for the repurchase of common stock totaled $68.0 million and $0
for the first six months of 2007 and 2006, respectively. Cash used for the payment of
dividends totaled $11.2 million and $9.5 million for the first six months of 2007 and
2006, respectively.

We
currently expect to fund expenditures for capital requirements as well as liquidity needs
created by changes in working capital from a combination of available cash and short-term
investment balances and internally generated funds. As of each of June 30, 2007 and 2006,
we had no debt outstanding. We believe that our cash flow from operations and existing
cash balances and short-term investments will be sufficient to meet our cash requirements
for at least the next twelve months. Cash requirements for periods beyond the next twelve
months will depend on our profitability, our ability to manage working capital
requirements and our rate of growth.

Our
international sales are subject to inherent risks, including fluctuations in local
economies; difficulties in staffing and managing foreign operations; greater difficulty in
accounts receivable collection; costs and risks of localizing products for foreign
countries; unexpected changes in regulatory requirements, tariffs and other trade
barriers; difficulties in the repatriation of earnings and burdens of complying with a
wide variety of foreign laws. The vast majority of our sales outside of North America are
denominated in local currencies, and accordingly, we are subject to the risks associated
with fluctuations in currency rates. In particular, increases in the value of the dollar
against foreign currencies decrease the U.S. dollar value of foreign sales requiring that
we either increase our price in the local currency, which could render our product prices
noncompetitive, or suffer reduced revenues and gross margins as measured in U.S. dollars.
These dynamics have adversely affected our revenue growth in international markets in
previous years. Our foreign currency hedging program includes both foreign currency
forward and purchased option contracts to reduce the effect of exchange rate fluctuations.
However, our hedging program will not eliminate all of our foreign exchange risks. (See
Net Foreign Exchange Loss).

The
marketplace for our products dictates that many of our products be shipped very quickly
after an order is received. As a result, we are required to maintain significant
inventories. Therefore, inventory obsolescence is a risk for us due to frequent
engineering changes, shifting customer demand, the emergence of new industry standards and
rapid technological advances including the introduction by us or our competitors of
products embodying new technology. While we adjust for excess and obsolete inventories and
we monitor the valuation of our inventories, there can be no assurance that our valuation
adjustments will be sufficient.

Off-Balance
Sheet Arrangements.We have no debt or off-balance sheet debt. As of June
30, 2007, we have contractual purchase commitments with various suppliers of general
components and customized inventory components of approximately $7.0 million. As of June
30, 2007, we have outstanding guarantees for payment of customs and foreign grants
totaling approximately $4.5 million. (See Note 9 of Notes to Consolidated Financial
Statements). As of June 30, 2007, we did not have any relationships with any
unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements. As such, we are not exposed to any financing,
liquidity, market or credit risk that could arise if we were engaged in such
relationships.

We
are exposed to a variety of risks, including foreign currency fluctuations and changes in
the market value of our investments. In the normal course of business, we employ
established policies and procedures to manage our exposure to fluctuations in foreign
currency values and changes in the market value of our investments.

Foreign
Currency Hedging Activities. Our objective in managing our exposure to foreign
currency exchange rate fluctuations is to reduce the impact of adverse fluctuations in
such exchange rates on our earnings and cash flow. Accordingly, we utilize purchased
foreign currency option contracts and forward contracts to hedge our exposure on
anticipated transactions and firm commitments. The principal currencies hedged are the
euro, British pound and Japanese yen. We monitor our foreign exchange exposures regularly
to ensure the overall effectiveness of our foreign currency hedge positions. However,
there can be no assurance that our foreign currency hedging activities will substantially
offset the impact of fluctuations in currency exchanges rates on our results of operations
and financial position. Based on the foreign exchange instruments outstanding at June 30,
2007, an adverse change (defined as 20% in the Asian currencies and 10% in all other
currencies) in exchange rates would result in a decline in the aggregate fair market value
of all of our instruments outstanding of approximately $4.8 million. However, as we
utilize foreign currency instruments for hedging anticipated and firmly committed
transactions, we believe that a loss in fair value for those instruments will be
substantially offset by increases in the value of the underlying exposure.

Short-term
Investments. The fair value of our investments in marketable securities at
June 30, 2007 was $79.7 million. Investments with maturities beyond one year are
classified as short-term based on their highly liquid nature and because such marketable
securities represent the investment of cash that is available for current operations. Our
investment policy is to manage our investment portfolio to preserve principal and
liquidity while maximizing the return on our investment portfolio through the full
investment of available funds. We diversify our marketable securities portfolio by
investing in multiple types of investment-grade securities. Our investment portfolio is
primarily invested in securities with at least an investment grade rating to minimize
interest rate and credit risk as well as to provide for an immediate source of funds.
Based on our investment portfolio and interest rates at June 30, 2007, a 100 basis point
increase or decrease in interest rates would result in a decrease or increase of
approximately $400,000 in the fair value of our investment portfolio. Although changes in
interest rates may affect the fair value of our investment portfolio and cause unrealized
gains or losses, such gains or losses would not be realized unless the investments are
sold.

In
July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) 48, Accounting for Uncertainty in Income Taxes 
an interpretation of Statement of Financial Accounting Standards (SFAS)
109. This interpretation clarifies the accounting for uncertainty in income taxes
recognized in an entitys financial statements in accordance with SFAS 109,
Accounting for Income Taxes. It prescribes a recognition threshold and measurement
attribute for financial statement disclosure of tax positions taken or expected to be
taken on a tax return. This interpretation is effective for fiscal years beginning after
December 15, 2006. We adopted FIN 48 on January 1, 2007, as required. The adoption of FIN
48 did not have a significant impact on our financial position or results of operations.
(See Note 6 of Notes to Consolidated Financial Statements.)

In
September 2006, the FASB issued SFAS 157, Fair Value Measurements. This standard
defines fair value, establishes a framework for measuring fair value in accounting
principles generally accepted in the United States of America, and expands disclosure
about fair value measurements. This pronouncement applies under other accounting standards
that require or permit fair value measurements. Accordingly, this statement does not
require any new fair value measurement. This statement is effective for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. We will
be required to adopt SFAS 157 in the first quarter of fiscal year 2008. We are currently
evaluating the requirements of SFAS 157 and have not yet determined the impact on our
consolidated financial statements.

In
March 2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF
Issue 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities
Should Be Presented in the Income Statement (that is, Gross versus Net Presentation).
Taxes within the scope of EITF Issue 06-3 include any taxes assessed by a governmental
authority that are directly imposed on a revenue-producing transaction between a seller
and a customer and may include, but are not limited to, sales taxes, use taxes,
value-added taxes, and some excise taxes. The EITF concluded that the presentation of
these taxes on either a gross (included in revenues and costs) or a net (excluded from
revenue) basis is an accounting policy decision that should be disclosed. For any such
taxes that are reported on a gross basis, a company should disclose the amounts of those
taxes in interim and annual financial statements. Our policy is to exclude all such taxes
from revenue. The provisions of EITF 06-3 are effective for interim and annual reporting
periods beginning after December 15, 2006. The adoption of EITF 06-3 did not have any
effect on our consolidated financial statements.

In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities  including an amendment of FASB Statement
115. This standard permits an entity to measure many financial instruments and
certain other assets and liabilities at fair value on an instrument-by-instrument basis.
We will be required to adopt SFAS 159 in the first quarter of fiscal year 2008. We are
currently evaluating the requirements of SFAS 159 and have not yet determined the impact
on our consolidated financial statements.

Our
Chief Executive Officer and Chief Financial Officer, based on the evaluation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended) required by paragraph (b) of Rule 13a-15 or
Rule 15d-15, as of June 30, 2007, have concluded that our disclosure controls and
procedures were effective to ensure the timely collection, evaluation and disclosure of
information relating to us that would potentially be subject to disclosure under the
Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder. We continue to enhance our internal control over financial reporting by adding
resources in key functional areas with the goal of monitoring our operations at the level
of documentation, segregation of duties, and systems security necessary, as well as
transactional control procedures required under Auditing Standard No. 2 issued by the
Public Company Accounting Oversight Board. We discuss and disclose these matters to the
audit committee of our board of directors and to our auditors. During the quarter ended
June 30, 2007, there were no changes in our internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of the Rule 13a-15
or Rule 15d-15 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.

PART II  OTHER
INFORMATION

We
filed a patent infringement action on January 25, 2001 in the U.S. District Court, Eastern
District of Texas (Marshall Division) claiming that The MathWorks, Inc.
(MathWorks) infringed certain of our U.S. patents. On January 30, 2003, a jury
found infringement by MathWorks of three of the patents involved and awarded us specified
damages. On June 23, 2003, the District Court entered final judgment in favor of us and
entered an injunction against MathWorks sale of its Simulink and related products
and stayed the injunction pending appeal. Upon appeal, the judgment and the injunction
were affirmed by the U.S. Court of Appeals for the Federal Circuit (September 3, 2004).
Subsequently the stay of injunction was lifted by the District Court. In November 2004,
the final judgment amount of $7.4 million which had been held in escrow pending appeal was
released to us.

An
action was filed by MathWorks against us on September 22, 2004, in the U.S. District
Court, Eastern District of Texas (Marshall Division), claiming that on that day MathWorks
had released modified versions of its Simulink and related products, and seeking a
declaratory judgment that the modified products do not infringe the three patents adjudged
infringed in the District Courts decision of June 23, 2003, (and affirmed by the
Court of Appeals on September 3, 2004). On November 2, 2004, MathWorks served the
complaint on us. We filed an answer to MathWorks declaratory judgment complaint,
denying MathWorks claims of non-infringement and alleging our own affirmative
defenses. On January 5, 2005, the Court denied a contempt motion by us to enjoin the
modified Simulink products under the injunction in effect from the first case. On January
7, 2005, we amended our answer to include counterclaims that MathWorks modified
products are infringing three of our patents, and requested unspecified damages and an
injunction. MathWorks filed its reply to our counterclaims on February 7, 2005, denying
the counterclaims and alleging affirmative defenses. On March 2, 2005, we filed a notice
of appeal regarding the Courts denial of the contempt motion. On March 15, 2005, the
Court stayed MathWorks declaratory judgment action, pending a decision on the appeal
by the Court of Appeals for the Federal Circuit. On February 9, 2006, the Court of Appeals
for the Federal Circuit affirmed the District Courts January 2005 order. On November
22, 2006, the District Court lifted the stay. The case schedule has yet to be set in this
action. During the fourth quarter of 2004, we accrued $4 million related to our probable
loss from this contingency, which consists entirely of anticipated patent defense costs
that are probable of being incurred. In the fourth quarter of 2006, we accrued an
additional $600,000 related to this contingency. We charged approximately $9,000 against
this accrual during the second quarter of 2007. We have charged a total of $611,000
against this accrual through June 30, 2007.

ITEM 1A. RISK FACTORS

U.S./Global
Economic Change Will Impact Our Future Business. As has occurred in the
past, the markets in which we do business could again experience the negative effects of a
slowdown in the U.S. and/or Global economies. The worsening of the U.S. or Global
economies could result in reduced purchasing and capital spending in any of our markets
which could have a material adverse effect on our operating results. Our business could
also be subject to or impacted by acts of terrorism and/or the effects that war or
continued U.S. military action would have on the U.S. and/or Global economies. Our
business could also be impacted by public health concerns, natural disasters, disruptions
to public or commercial transportation systems, political instability or similar events
which result in increased difficulty or higher costs for the export of products into
affected regions, the import of components used in our products from affected regions,
and/or the effects the event has on the economy in regions in which we do business.

We
Have Established a Budget and Variations From Our Budget Will Affect Our Financial
Results. We have established an operating budget for 2007. Our budget was
established based on the estimated revenue from forecasted sales of our products which is
based on economic conditions in the markets in which we do business as well as the timing
and volume of our new products and the expected penetration of both new and existing
products in the marketplace. Our spending for the remainder of the year could exceed our
budget due to a number of factors, including:

o

additional marketing costs for new product introductions and/or for conferences and tradeshows;

o

increased costs from hiring more product development engineers or other personnel;

Any future decreased demand for our
products could result in decreased revenue and could require us to revise our budget and
reduce expenditures. Exceeding our established operating budget or failing to reduce
expenditures in response to any decrease in revenue could have a material adverse effect
on our operating results.

We
May Experience Component Shortages. As has occurred in the past and as may
be expected to occur in the future, supply shortages of components used in our products,
including sole source components, can result in significant additional costs and
inefficiencies in manufacturing. If we are unsuccessful in resolving any such component
shortages in a timely manner, we will experience a significant impact on the timing of
revenue, a possible loss of revenue, and/or an increase in manufacturing costs, any of
which would have a material adverse impact on our operating results.

Our
Business is Dependent on Key Suppliers.Our manufacturing processes use
large volumes of high-quality components and subassemblies supplied by outside sources.
Several of these components are available through sole or limited sources. Sole-source
components purchased include custom application-specific integrated circuits
(ASICs), chassis and other components. We have in the past experienced delays
and quality problems in connection with sole-source components, and there can be no
assurance that these problems will not recur in the future. Accordingly, our failure to
receive sole-source components from suppliers could result in a material adverse effect on
our revenues and operating results.

Our
Quarterly Results are Subject to Fluctuations Due to Various Factors. Our
quarterly operating results have fluctuated in the past and may fluctuate significantly in
the future due to a number of factors, including:

o

changes in the mix of products sold;

o

the availability and pricing of components from third parties (especially sole sources);

o

the timing of orders;

o

pricing of our products;

o

fluctuations in foreign currency exchange rates;

o

the timing, cost or outcome of intellectual property litigation;

o

the difficulty in maintaining margins, including the higher margins traditionally achieved in international sales; and

o

changes in pricing policies by us, our competitors or suppliers.

Specifically, if the local currencies
in which we sell weaken against the U.S. dollar, and if the local sales prices cannot be
raised due to competitive pressures, we will experience a deterioration of our gross and
net profit margins. If the U.S. dollar strengthens in the future, it could have a material
adverse effect on our gross and net profit margins.

As
has occurred in the past and as may be expected to occur in the future, our new software
products or new operating systems of third parties on which our products are based often
contain bugs or errors that can result in reduced sales and/or cause our support costs to
increase, either of which could have a material adverse impact on our operating results.
Furthermore, we have significant revenues from customers in industries such as
semiconductors, automated test equipment, telecommunications, aerospace, defense and
automotive which are cyclical in nature. Downturns in these industries could have a
material adverse effect on our operating results.

In
recent years, our revenues have been characterized by seasonality, with revenues typically
being relatively constant in the second and third quarters, growing in the fourth quarter
and declining from the fourth quarter of the year to the first quarter of the following
year. This historical trend may be affected in the future by the economic impact of larger
orders as well as the timing of new product introductions and/or acquisitions, if any. We
believe the seasonality of our revenue results from the international mix of our revenue
and the variability of the budgeting and purchasing cycles of our customers throughout
each international region. In addition, total operating expenses have in the past tended
to increase in each successive quarter and have fluctuated as a percentage of revenue
based on the seasonality of our revenue.

Our
Success Depends on New Product Introductions and Market Acceptance of Our
Products. The market for our products is characterized by rapid
technological change, evolving industry standards, changes in customer needs and frequent
new product introductions, and is therefore highly dependent upon timely product
innovation. Our success is dependent on our ability to successfully develop and introduce
new and enhanced products on a timely basis to replace declining revenues from older
products, and on increasing penetration in domestic and international markets. In the
past, we have experienced significant delays between the announcement and the commercial
availability of new products. Any significant delay in releasing new products could have a
material adverse effect on the ultimate success of a product and other related products
and could impede continued sales of predecessor products, any of which could have a
material adverse effect on our operating results. There can be no assurance that we will
be able to introduce new products in accordance with announced release dates, that new
products will achieve market acceptance or that any such acceptance will be sustained for
any significant period. Failure of new products to achieve or sustain market acceptance
could have a material adverse effect on our operating results. Moreover, there can be no
assurance that our international sales will continue at existing levels or grow in
accordance with our efforts to increase foreign market penetration.

We
are Subject to Risks Associated with Our Web Site. We devote resources to
maintain our Web site as a key marketing, sales and support tool and expect to continue to
do so in the future. However, there can be no assurance that we will be successful in our
attempt to leverage the Web to increase sales. We host our Web site internally. Any
failure to successfully maintain our Web site or any significant downtime or outages
affecting our Web site could have a significant adverse impact on our operating results.

We
Operate in Intensely Competitive Markets. The markets in which we operate
are characterized by intense competition from numerous competitors, some of which are
divisions of large corporations having far greater resources than we have, and we expect
to face further competition from new market entrants in the future. A key competitor is
Agilent Technologies Inc. Agilent offers its own line of instrument controllers, and also
offers hardware and software products that provide solutions that directly compete with
our virtual instrumentation products. Agilent is aggressively advertising and marketing
products that are competitive with our products. Because of Agilents strong position
in the instrumentation business, changes in its marketing strategy or product offerings
could have a material adverse effect on our operating results.

We
believe our ability to compete successfully depends on a number of factors both within and
outside our control, including:

o

new product introductions by competitors;

o

product pricing;

o

quality and performance;

o

success in developing new products;

o

adequate manufacturing capacity and supply of components and materials;

o

efficiency of manufacturing operations;

o

effectiveness of sales and marketing resources and strategies;

o

strategic relationships with other suppliers;

o

timing of our new product introductions;

o

protection of our products by effective use of intellectual property laws;

o

the outcome of any material intellectual property litigation;

o

general market and economic conditions; and,

o

government actions throughout the world.

There can be no assurance that we
will be able to compete successfully in the future.

We
Rely on Management Information Systems and any Disruptions in Our Systems Would Adversely
Affect Us. We rely on two primary regional centers for our management
information systems and on multiple systems in some branches not covered by our two
regional centers. As with any information system, unforeseen issues may arise that could
affect our ability to receive adequate, accurate and timely financial information, which
in turn could inhibit effective and timely decisions. Furthermore, it is possible that one
or both of our two regional information systems could experience a complete or partial
shutdown. If such a shutdown occurred, it could impact our product shipments and revenues,
as order processing and product distribution are heavily dependent on the integrated
management information systems in each region. Accordingly, our operating results in such
periods would be adversely impacted. We are working to maintain reliable regional
management information systems to control costs and improve our ability to deliver our
products in our markets worldwide. No assurance can be given that our efforts will be
successful. The failure to receive adequate, accurate and timely financial information
could inhibit our ability to make effective and timely decisions.

During
the second quarter of 2007, we continued to devote resources to the implementation of
systems to support the shipment of products from our manufacturing facility and warehouse
in Hungary directly to customers worldwide, and to the continued development of our web
offerings. There can be no assurance that we will not experience difficulties with these
new systems. Difficulties with these new systems may interrupt our normal operations,
including our ability to provide quotes, process orders, ship products, provide services
and support to our customers, bill and track our customers, fulfill contractual
obligations and otherwise run our business. Any disruption occurring with these systems
may have a material adverse effect on our operating results. During the remainder of 2007,
we plan to continue to devote significant resources to the implementation of systems that
support shipment of product from our manufacturing facility and warehouse in Hungary
directly to our customers worldwide, and to the continued development of our web
offerings. Any failure to successfully implement these initiatives could have a material
adverse effect on our operating results.

We
are Subject to Risks Associated with Our Centralization of Inventory and
Distribution. We are devoting considerable resources to centralizing our
distribution to a limited number of shipping points. Currently, shipments to our European customers are
sourced from our warehouse facility in Debrecen, Hungary. Shipments to almost all
customers in the Americas were previously sourced from our warehouse in Austin, Texas.
Since July 2007, this distribution operation has been transferred to Debrecen, Hungary. Shipments to most of our
customers in Asia are currently managed out of local inventory managed by our branch operations in those countries. Our
planned centralization of inventory and distribution to a limited number of shipping points is subject to inherent
risks, including:

o

burdens of complying with additional and/or more complex VAT and customs regulations;

o

severe concentration of inventory increasing the impact associated with fire or other natural disasters to customer order
fulfillment;

o

lack of complete visibility of centralized inventory due to multiple information systems; and

o

potential for month-end cut-off error due to time zone differences between our information systems.

No
assurance can be given that our efforts will be successful. Any difficulties with the
centralization of distribution or delays in the implementation of the systems or processes
to support this centralized distribution could result in interruption of our normal
operation, including our ability to process orders and ship products to our customers. Any
failure or delay in successfully centralizing our inventory in and distribution from our
facility in Hungary could have a materially adverse effect on our operating results.

We
are Subject to Various Risks Associated with International Operations and Foreign
Economies. Our international sales are subject to inherent risks,
including;

o

fluctuations in local economies;

o

fluctuations in foreign currencies relative to the U.S. dollar;

o

difficulties in staffing and managing foreign operations;

o

greater difficulty in accounts receivable collection;

o

costs and risks of localizing products for foreign countries;

o

unexpected changes in regulatory requirements;

o

tariffs and other trade barriers;

o

difficulties in the repatriation of earnings; and,

o

the burdens of complying with a wide variety of foreign laws.

In many foreign countries,
particularly in those with developing economies, it is common to engage in business
practices that are prohibited by United States regulations applicable to us such as the
Foreign Corrupt Practices Act. Although we implement policies and procedures designed to
ensure compliance with these laws, there can be no assurance that all of our employees,
contractors and agents, including those based in or from countries where practices which
violate such United States laws may be customary, will not take actions in violation of
our policies. Any violation of foreign or United States laws by our employees, contractors
or agents, even if such violation is prohibited by our policies, could have a material
adverse effect on our business. We must also comply with various import and export
regulations. The application of these various regulations depends on the classification of
our products which can change over time as such regulations are modified or interpreted.
As a result, even if we are currently in compliance with applicable regulations, there can
be no assurance that we will not have to incur additional costs or take additional
compliance actions in the future. Failure to comply with these regulations could result in
fines and/or termination of import and export privileges, which could have a material
adverse effect on our operating results. Additionally, the regulatory environment in some
countries is very restrictive as their governments try to protect their local economy and
value of their local currency against the U.S. dollar. Sales made by our international
direct sales offices are denominated in local currencies, and accordingly, the U.S. dollar
equivalent of these sales is affected by changes in the foreign currency exchange rates.
Net of hedging results, the change in exchange rates had the effect of increasing our
consolidated sales by 3% in the second quarter of 2007 compared to the second quarter of
2006. Since most of our international operating expenses are also incurred in local
currencies, the change in exchanges rates had the effect of increasing our operating
expenses by $1.6 million for the quarter ended June 30, 2007 compared to the comparable
prior year period. If the U.S. dollar weakens in the future, it could result in our having
to reduce prices locally in order for our products to remain competitive in the local
marketplace. If the U.S. dollar strengthens in the future, and we are unable to
successfully raise our international selling prices, it could have a material adverse
effect on our operating results.

A
Substantial Majority of Our Manufacturing Capacity is Located in Hungary.Our Hungarian manufacturing facility sources a substantial majority of our sales.
Currently we are continuing to develop and implement information systems to support the
operation of this facility. In the third quarter of 2007, we intend to continue to
implement systems and processes that support the direct shipment of product orders to our
customers worldwide from our manufacturing facility in Hungary. In order to better insure
timely shipment of products to our customers we will maintain the vast majority of our
inventory at our Hungary manufacturing facility. In addition to being subject to the risks
of maintaining such a concentrated global inventory, this facility and its operation are
also subject to risks associated with doing business internationally, including:

o

difficulty in managing manufacturing operations in a foreign country;

o

difficulty in achieving or maintaining product quality;

o

interruption to transportation flows for delivery of components to us and finished goods to our customers, and

o

changes in the country's political or economical conditions.

No assurance can be given that our
efforts will be successful. Accordingly, a failure to deal with these factors could result
in interruption in the facilitys operation or delays in expanding its capacity,
either of which could have a material adverse effect on our operating results.

Our
Income Tax Rate is Affected by Tax Benefits in Hungary. As a result of
certain foreign investment incentives available under Hungarian law, the profit from our
Hungarian operation is currently subject to a reduced income tax rate. These benefits may
not be available in the future due to changes in Hungarys political condition and/or
tax laws. The reduction or elimination of these foreign investment incentives would result
in the reduction or elimination of certain tax benefits thereby increasing our future
effective income tax rate, which could have a material adverse effect on our operating
results.

We
received a substantial income tax benefit from the extraterritorial income exemption
(ETI) under U.S. law. The ETI rules provided that a percentage of the profits
from products and intangibles exported from the U.S. were exempt from U.S. tax. Effective
December 31, 2006, this benefit is no longer available as the ETI was repealed by the
American Jobs Creation Act of 2004. The repeal of the ETI has increased our effective
income tax rate, which has had a material adverse effect on our operating results.
However, the effect of the repeal of the ETI has been offset by the effects of the
increased benefit from the deduction for income from qualified domestic production
activities and increased profits in certain foreign jurisdictions with reduced income tax
rates.

Our
Product Revenues are Dependent on Certain Industries. Sales of our products
are dependent on customers in certain industries, particularly the telecommunications,
semiconductor, automotive, automated test equipment, defense and aerospace industries. As
experienced in the past, and as may be expected to occur in the future, downturns
characterized by diminished product demand in any one or more of these industries could
result in decreased sales, which could have a material adverse effect on our operating
results.

Our
Reported Financial Results May be Adversely Affected by Changes in Accounting Principles
Generally Accepted in the United States. We prepare our financial statements in
conformity with accounting principles generally accepted in the U.S. These accounting
principles are subject to interpretation by the Financial Accounting Standards Board, the
American Institute of Certified Public Accountants, the Securities and Exchange Commission
and various bodies formed to interpret and create appropriate accounting policies. A
change in these policies or interpretations could have a significant effect on our
reported financial results, and could affect the reporting of transactions completed
before the announcement of a change. For example, beginning in the first quarter of fiscal
2006, with the adoption of SFAS 123(R), we now record a charge to earnings for employee
stock option grants for all stock options unvested at December 31, 2005. This accounting
pronouncement has had a material negative impact on our financial results. Technology
companies generally, and our company specifically, have in the past relied on stock
options as a major component of our employee compensation packages. Because we are
required to expense options, we have changed our equity compensation program to no longer
grant options but instead grant restricted stock units. Furthermore, because we are
required to expense options, we may be less likely to sustain profitability in the future.

Our
Business Depends on Our Proprietary Rights and We are Subject to Intellectual Property
Litigation. Our success depends on our ability to obtain and maintain
patents and other proprietary rights relative to the technologies used in our principal
products. Despite our efforts to protect our proprietary rights, unauthorized parties may
have in the past infringed or violated certain of our intellectual property rights. We
from time to time engage in litigation to protect our intellectual property rights. In
monitoring and policing our intellectual property rights, we have been and may be required
to spend significant resources. We from time to time may be notified that we are
infringing certain patent or intellectual property rights of others. There can be no
assurance that any existing intellectual property litigation or any intellectual property
litigation initiated in the future, will not cause significant litigation expense,
liability, injunction against some of our products, and a diversion of managements
attention, any of which may have a material adverse effect on our operating results.

Compliance
With Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 is Costly and
Challenging. As required by Section 302 of the Sarbanes-Oxley Act of 2002,
this Form 10-Q contains our managements certification of adequate disclosure
controls and procedures as of June 30, 2007. Our most recent report on Form 10-K contained
a report by our management on our internal control over financial reporting including an
assessment of the effectiveness of our internal control over financial reporting as of
December 31, 2006. Our most recent report on Form 10-K also contained an attestation and
report by our auditors with respect to managements assessment of the effectiveness
of internal control over financial reporting under Section 404. While these assessments
and reports did not reveal any material weaknesses in our internal control over financial
reporting, compliance with Sections 302 and 404 is required for each future fiscal year
end. We expect that the ongoing compliance with Sections 302 and 404 will continue to be
both very costly and very challenging and there can be no assurance that material
weaknesses will not be identified in future periods. Any adverse results from such ongoing
compliance efforts could result in a loss of investor confidence in our financial reports
and have an adverse effect on our stock price.

Our
Business Depends on the Continued Service of Key Management and Technical
Personnel. Our success depends upon the continued contributions of our key
management, sales, marketing, research and development and operational personnel,
including Dr. Truchard, our Chairman and Chief Executive Officer, and other members of
senior management and key technical personnel. We have no agreements providing for the
employment of any of our key employees for any fixed term and our key employees may
voluntarily terminate their employment with us at any time. The loss of the services of
one or more of our key employees in the future could have a material adverse effect on our
operating results. We also believe our future success will depend upon our ability to
attract and retain additional highly skilled management, technical, marketing, research
and development, and operational personnel with experience in managing large and rapidly
changing companies, as well as training, motivating and supervising employees. As a result
of the impact that the adoption of SFAS 123R in our first quarter of 2006 has had on our
results of operations, we have changed our equity compensation program. We now grant fewer
equity instruments and the type of equity instrument is restricted stock units rather than
stock options, which may make it more difficult for us to attract or retain qualified
management and technical personnel, which could have an adverse effect on our operating
results. In addition, the recruiting environment for software engineering, sales and other
technical professionals is very competitive. Competition for qualified software engineers
is particularly intense and is likely to result in increased personnel costs. Our failure
to attract or retain qualified software engineers could have an adverse effect on our
operating results. We also recruit and employ foreign nationals to achieve our hiring
goals primarily for engineering and software positions. There can be no guarantee that we
will continue to be able to recruit foreign nationals at the current rate. There can be no
assurance that we will be successful in retaining our existing key personnel or attracting
and retaining additional key personnel. Failure to attract and retain a sufficient number
of our key personnel could have a material adverse effect on our operating results.

Our
Manufacturing Operations are Subject to a Variety of Environmental Regulations and
Costs. We must comply with many different governmental regulations related
to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous
chemicals used in our manufacturing operations in the U.S. and in Hungary. Although we
believe that our activities conform to presently applicable environmental regulations, our
failure to comply with present or future regulations could result in the imposition of
fines, suspension of production or a cessation of operations. Any such environmental
regulations could require us to acquire costly equipment or to incur other significant
expenses to comply with such regulations. Any failure by us to control the use of or
adequately restrict the discharge of hazardous substances could subject us to future
liabilities.

Our
Acquisitions are Subject to a Number of Related Costs and Challenges. We
have from time to time acquired, and may in the future acquire, complementary businesses,
products or technologies. Achieving the anticipated benefits of an acquisition depends
upon whether the integration of the acquired business, products or technology is
accomplished efficiently and effectively. In addition, successful acquisitions may
require, among other things, integration of product offerings, manufacturing operations
and coordination of sales and marketing and R&D efforts. These difficulties can become
more challenging due to the need to coordinate geographically separated organizations, the
complexities of the technologies being integrated, and the necessities of integrating
personnel with disparate business backgrounds and combining two different corporate
cultures. The integration of operations following an acquisition also requires the
dedication of management resources, which may distract attention from our day-to-day
business and may disrupt key R&D, marketing or sales efforts. The inability of our
management to successfully integrate any future acquisition could harm our business. Some
of the existing products previously sold by the acquired entities are of lesser quality
than our products and/or could contain errors that produce incorrect results in which
users rely or cause failure or interruption of systems or processes that could subject us
to liability claims that could have a material adverse effect on our operating results or
financial position. Furthermore, products acquired in connection with acquisitions may not
gain acceptance in our markets, and we may not achieve the anticipated or desired benefits
of such transaction.

Provisions
in Our Charter Documents and Delaware Law and Our Stockholder Rights Plan May Delay or
Prevent an Acquisition of Us. Our certificate of incorporation and bylaws
and Delaware law contain provisions that could make it more difficult for a third party to
acquire us without the consent of our Board of Directors. These provisions include a
classified Board of Directors, prohibition of stockholder action by written consent,
prohibition of stockholders to call special meetings and the requirement that the holders
of at least 80% of our shares approve any business combination not otherwise approved by
two-thirds of the Board of Directors. Delaware law also imposes some restrictions on
mergers and other business combinations between us and any holder of 15% or more of our
outstanding common stock. In addition, our Board of Directors has the right to issue
preferred stock without stockholder approval, which could be used to dilute the stock
ownership of a potential hostile acquirer. Our Board of Directors adopted a new
stockholders rights plan on January 21, 2004, pursuant to which we declared a dividend of
one right for each share of our common stock outstanding as of May 10, 2004. This rights
plan replaced a similar rights plan that had been in effect since our initial public
offering in 1995. Unless redeemed by us prior to the time the rights are exercised, upon
the occurrence of certain events, the rights will entitle the holders to receive upon
exercise thereof shares of our preferred stock, or shares of an acquiring entity, having a
value equal to twice the then-current exercise price of the right. The issuance of the
rights could have the effect of delaying or preventing a change of control of us.

We
Are Subject to the Risk of Product Liability Claims. Our products are
designed to provide information upon which users may rely. Our products are also used in
real time applications requiring extremely rapid and continuous processing and
constant feedback. Such applications give rise to the risk that failure or interruption of
the system or application could result in economic damage or bodily harm. We attempt to
assure the quality and accuracy of the processes contained in our products, and to limit
our product liability exposure through contractual limitations on liability, limited
warranties, express disclaimers and warnings as well as disclaimers contained in our
shrink wrap license agreements with end-users. If our products contain errors
that produce incorrect results on which users rely or cause failure or interruption of
systems or processes, customer acceptance of our products could be adversely affected.
Further, we could be subject to liability claims that could have a material adverse effect
on our operating results or financial position. Although we maintain liability insurance
for product liability matters, there can be no assurance that such insurance or the
contractual limitations used by us to limit our liability will be sufficient to cover or
limit any claims which may occur.

The
following table provides information as of June 30, 2007 with respect to the shares of
common stock that we repurchased during the second quarter of 2007.

Period

Total number
of shares

Average price
paid per share

Total number of shares
purchased as part of a publicly
announced plan or program

Maximum number of shares that
may yet be purchased under
the plan or program

April 1, 2007 to April 30, 2007







1,943,074

May 1, 2007 to May 31, 2007

1,303,804

$

29.69

1,303,804

639,270

June 1, 2007 to June 30, 2007







639,270

Total

1,303,804

$

29.69

1,303,804

For
the past several years, we have maintained various stock repurchase programs. In July
2007, our board of directors approved a new share repurchase plan that increases the
aggregate number of shares of common stock that we are authorized to repurchase from
639,270 to 3 million shares. Our repurchase plan has no expiration date.

From
time to time our directors, executive officers and other insiders may adopt stock trading
plans pursuant to Rule 10b5-1(c) promulgated by the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended. Jeffrey L. Kodosky and James J.
Truchard have made periodic sales of our stock pursuant to such plans.